Summary by Erin Howry
Master of Accountancy Program
University of South Florida, Summer 2003
The purpose of this article is to counter the notion that the Internet renders strategy obsolete, arguing that for a business to be successful managers must view the Internet as a complement to their current ways of competing. Porter addresses key topics that lead to the conclusion that the Internet should be viewed as a part of the whole business operation, not a stand alone entity. He begins by outlining a history of Internet businesses, then argues why they were perceived to be profitable when in hindsight the opposite was true. Porter then gets back to the basics of business, detailing what must happen for a business to be successful. Next, he discusses how the Internet has influenced industry structure. Finally, he analyzes the relationship between the Internet and strategy, closing with recommendations for the future of e-business.
Porter begins by stating that experiences a company has had with the Internet up until this point must be largely discounted and that many of the lessons learned should be forgotten (64). The reasoning for his viewpoint is that “the Internet tends to alter industry structures in ways that dampen overall profitability, and it has a leveling effect on business practices, reducing the ability of any company to establish an operational advantage that can be sustained”(64). The solution – to build on proven principles of effective strategy using the Internet as a complement to traditional ways of competing.
Porter states, “Companies that have deployed Internet technology have been confused by distorted market signals, often of their own creation”(64). Why? He says that sales figures alone have been distorted for the following reasons.
First, prices for products placed for sale online have been heavily discounted, making demand for these goods artificially high.
Second, customer curiosity has prompted many online sales. When the curiosity fades and the customers return to their normal buying patterns, the sales fade as well.
Third, some revenues have been received in the form of stock rather than cash. The cost side of the equation has been equally distorted. Many suppliers have offered their products or services at discounted prices in order to affiliate themselves with an online business or have taken stock instead of cash for payment. These practices cannot continue for long.
Finally, Porter suggest the main reason for the multitude of dot.coms is that “They were able to raise capital without having to demonstrate viability”(65). Also the multitude signals “low-barriers to entry, always a danger sign”(65).
As the newness of the Internet begins to fade, a company returns to normal business practices to sustain a competitive advantage. To be a success, Porter states that true economic value is the determining factor. He defines economic value as “the gap between price and cost, and it is reliably measured only by sustained profitability”(65). So how can the Internet be used to create economic value? Porter identifies two fundamental factors that determine profitability: industry structure and sustainable competitive advantage.
The Internet has created some new industries such as the online auction and digital marketplaces, but for the most part the Internet has only changed the front end of existing industries. The Internet has had positive effects on different industries but for the most part the effects have been negative, mainly decreasing profitability. Since the Internet has reduced average profitability it becomes all the more important for companies to set themselves apart from the crowd. The only way to do this is to achieve a sustainable competitive advantage. To achieve this the company must operate at a lower cost, command a premium price, or both. Cost and price advantage can be achieved in two ways, operational effectiveness (doing the same things as your competitors, but better) or strategic positioning (doing different things than your competition). The Internet definitely helps operational effectiveness through the ease of real time information communication. However to gain competitive advantage, the company must be able to put this to use to reduce their costs or increase their profits more than their competition. Porter argues that the most important way to achieve a sustainable competitive advantage is through strategic positioning which has largely been ignored. Companies must integrate the Internet into their value chain making it difficult for competitors to copy their strategy. If their strategy is highly integrated, it makes it all the more difficult for a competitor to copy bits and pieces of best practices.
Porter ends his discussion with an emphasis on the Internet as a complement to, rather than a cannibal of existing business practices, “In our quest to see how the Internet is different, we have failed to see how the Internet is the same. While a new means of conducting business has become available, the fundamentals of competition remain unchanged. The next stage of the Internet’s evolution will involve a shift in thinking from e-business to business, from e-strategy to strategy. Only by integrating the Internet into overall strategy will this powerful new technology become an equally powerful force for competitive advantage”(78).
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